In 2012, the hair care category shrugged off global economic volatility to deliver its strongest performance in more than a decade. Sales climbed by 6% on 2011 (at fixed U.S. dollar exchange rates) to reach $75 billion, according to the latest data from Euromonitor International.

Shampoos were dominant, accounting for 35% of spending. Global growth of 7% was driven by strong trading up activity in the emerging markets. But conditioners had the more compelling growth story, with sales up by an unprecedented 10%. This reflected surging demand in the BRIC markets, as well as a positive response in developed markets to products offering intensive and targeted treatments, notably with the use of oils.

Colorants also performed well (up 6.5%) despite sluggishness in the U.S. and France. Burgeoning demand from the world’s emerging middle-class coupled with resilience in the U.K. and Germany, where there was an uptick on the back of weaker away-from-home salon spending, helped the category notch up more than $800 million of growth. L’Oréal Paris, Wella Professional and Garnier were the top performing brands, each generating more than $100 million of retail growth in absolute terms.

Some categories disappointed, however. Perms and relaxants slipped into contraction for the first time in five years, while hair loss treatments—one of the star performers of recent years—grew by only 1% due to a loss of traction in the key Japanese market. Styling agents and salon hair care also put in lackluster performances, highlighting their heavy dependency to the U.S., Japan and Western Europe.

Overall, emerging markets continued to prop up the global performance of hair care, fueling 92% of growth in absolute terms compared with 88% in 2011. Collectively, the emerging markets accounted for 49% of total retail hair care spending in 2012 compared with 38% in 2007 and 29% in 2002. The transfer of power from developed to emerging markets looks unstoppable, with the scales almost certain to tip over the course of this year. By 2017, emerging markets are forecast to account for 60% of the category’s global retail value. By any calculation, it is a remarkable shift in global consumption power.

A Potential Power Change in Latin America

The rising importance of the emerging markets to the industry’s profitability has compelled the world’s leading hair care manufacturers to rethink their global strategies. It is not as simple as ramping up investment in the BRICs, however. The cooling of the Brazilian economy is a warning that operating conditions in linchpin markets can change quickly.

It is an ominous sign that consumer confidence in Brazil has been falling steadily since the beginning of 2013, fueled by concerns about rising inflation. Brazil has been the hair care category’s fastest growing market over the past five years, in absolute terms, with sales increasing by $3.4 billion compared with $1.8 billion in China and $1.1 billion in India.

China and India Steam Ahead

Jitters over cooler economic growth in China are much less warranted than in Brazil. Over the first quarter of this year, the Chinese economy grew by 7.7%, which is hardly cause for concern.

Indeed, China still has potential to offer a better return on investment than anywhere else in the world, reflecting vast untapped growth potential in the interior municipalities. Retail sales of hair care products were up 9% in 2012, and average annual growth is forecast to remain at that level over the next five years.

The key change in China is in terms of consumer profile. Across fast-moving consumer goods, there is evidence that China’s middle class, especially in first-tier cities, has become more discerning and sophisticated in its buying patterns. This is illustrated by growing demand for functional hair care treatments, such as intensive conditioners. Anti-dandruff shampoo is also a key battleground

Beyond China, an Asian market to definitely watch over the next five years is India. In 2012, it was the 10th biggest market in the world for hair care, with sales summing $2.2 billion. By 2017, it is forecast to be the fifth biggest, with sales on course to double. In particular, low-priced branded shampoos and conditioners are pushing into rural areas, which account for over two-thirds of the population. The high humidity in much of the country is an upside for the category as women tend to channel a bigger slice of their beauty spending into hair care rather than skin care.

The Innovation Battleground

The lack of growth in the developed markets has brought innovation to the frontline of the hair care battleground. Developed markets, after all, continue to fuel a huge slice of global hair care spending (the U.S. is still the only $10 billion market, for example). The key opportunity for hair care manufacturers is rooted in a marked slowdown in salon spending, which is freeing up cash for value-added products in the home and, increasingly, DIY salon-style treatments.

Cue a portfolio shift toward products offering more intensive and tailored treatments. Indeed, the portfolio mix of hair care is looking more like skin care every month, with a growing focus on multi-step routines and anti-aging products, such as thickening treatments for specific areas of the scalp. Hair care strategy has been inspired by the skin care category, but the shift toward greater segmentation is also indicative of a new DIY pampering culture in Western markets coupled with demand for more personalized branding. Both are offshoots of the recessionary climate.

Oils, moisturizers and leave-in conditioning products have become increasingly visible. We are also seeing more shine boosters as well as pre-treatment masks, serums and products geared toward scalp health. With growth getting ever tighter in developed markets, corporate spending behind innovation will ramp up over the second half of this year as brands seek to establish new competitive points of differentiation.